Heatmap can be a wonderful tool showing in a visual way the evolution of market liquidity and order book activity over time. It provides a graphical representation of the order book’s depth (also called Level 2), showing the distribution of buy and sell limit orders across different price levels. This heatmap helps traders understand market dynamics, identify liquidity hotspots, and make more informed trading decisions.
While other software like Bookmap offer an automatic adjustment of colors representing the depth of market, the heatmap provided with Sierra chart doesn’t adjust automatically. It is necessary to adjust the parameters of the Heatmap every day to match the liquidity of the current day. And for specific assets such as treasuries bonds you even have to adjust it multiple time each day.
I will show you how to do it in the best way possible, I use heatmap every day for trading and I developed this method to be the fastest.
First, what is a bad representation of the heatmap. See the example below with Nasdaq (NQ).
As you can see, there is no definition of each level and the color is almost the same everywhere. There are 3 parameters that you need to change to solve this issue (go to “Analysis/Studies/Market Depth Historical graph/Settings”).
The “Highest Quantity For Coloring”, the “Lowest Quantity For Coloring” and the “Use Secondary Numbers Color for Quantities Greater Than or Equal To”.
First you need to modify the “Highest Quantity For Coloring”, this parameter is the high cut-off. Every level higher that this will be red. To change that, watch the highest level that you can see on the DOM and put a number just on top of this value.
Next is the “Lowest Quantity For Coloring”, this parameter is the low cut-off. Every level lower than this will have the background color. To work, this parameter needs to be lower than the “Highest Quantity For Coloring”. You need to increase the Lowest Quantity until you have a good contrast between the high levels in red and the background color with all the color variation in between (background color, white, yellow, orange and red).
In this example with the Nasdaq the “Highest Quantity For Coloring” is 75 and the “Lowest Quantity For Coloring” is 10.
The “Use Secondary Numbers Color for Quantities Greater Than or Equal To” for this part change the color of the numbers of the DOM (normally in white) to black. This parameter allows you to see the numbers when the levels have a white background. Put a number between the “Highest Quantity For Coloring” and “Lowest Quantity For Coloring” until you have black numbers when the levels are white.
And here it is, once you finished you can see each levels and there is a good contrast between each colors.
Once you understand the logic of this method you can change the parameters really fast, there are only 3 numbers to change after all.
As always, be careful, don’t tilt and have a good trading session.